India's central bank leaves key rate unchanged

NupurAcharya

MUMBAI--The Reserve Bank of India left its benchmark lending rate unchanged on Tuesday as it waited for more proof that the country's inflation rates are cooling.

The Indian central bank kept its overnight lending rate steady at 8% for its second policy meeting in a row, confident that inflation rates should remain in check thanks to the rupee's recent strength and expected moves by the new government in New Delhi to increase food supplies.

The Reserve Bank did, however, announce one adjustment to policy that will help add liquidity to the Indian economy. It said it would lower the statutory liquidity ratio--which defines what percent of assets banks have to invest in government bonds-by 0.50 percentage point to 22.5% from June 14.

"At this juncture, it is appropriate to leave the policy rate unchanged, and to allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy," the central bank said in its bimonthly policy statement.

The RBI left the cash reserve ratio, or the minimum percentage of deposits that lenders must park with the RBI, unchanged at 4%.

The central bank has raised its policy rate three times by a total of three-fourth of a percentage point since September when its new inflation-fighting governor, Raghuram Rajan took over.

It has been focusing on the consumer-price index inflation rate, which stood at 8.59% in April. It wants the consumer inflation rate to cool to 8% by January and further to 6% a year after that.

After the earlier interest rate increases, the RBI said has been taking break to let the impact work through the system.

"If the economy stays on this course, further policy tightening won't be warranted," it said adding it will have the headroom to ease if inflation falls faster than anticipated.

Some executives and policy makers have said they think the central bank is being too hawkish and the Indian economy needs lower interest rates now to revive growth. Mr. Rajan has said earlier that keeping inflation in check is the best way to promote sustainable growth.

Any further increases "could further impact muted industrial activity," said Arun Singh, senior economist with business information firm Dun & Bradstreet. "The best thing to do is to keep the rate at the same level till we have a clear picture on inflation."

The central bank will be keeping a close eye on what the new government in New Delhi, which was elected in a landslide victory last month, will be doing to promote growth as well as fix the infrastructure bottlenecks which exacerbate inflation.

"The decisive election result, together with improved sentiment should however, create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth during the course of the year," the RBI said.

Still, some economists are concerned that inflation could flare up again later this year, forcing the central bank to put off any easing, if the crucial monsoon rains this year are below average. The June-through-September rainy season irrigates most of India's fields so a bad monsoon can trigger food inflation which is particularly painful for India's poor populace.

Asia's third largest economy has been stuck in one of its worst periods of stagflation in recent years with growth remaining below 5% while consumer inflation has often climbed above 10%. This has led to less investment from abroad, less expansion by corporations and less spending by consumers.

However, Indian stocks and the rupee have been strengthening in the past month amid optimism that the Bharatiya Janata Party, will be better for business than the last administration.

Investors expect the new government to do more to revamp regulations and upgrade India's outdated infrastructure and get growth going again.

With growth expected to rebound and inflation expected to continue to slide, the Reserve Bank probably won't be lowering its key interest rate any time this year, economists said.

"There could be some (interest rate) reduction between January and March but that too will be contingent on inflation numbers," said Madan Sabnavis, chief economist with Care Ratings.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.